"… Friday's close has marked several buying opportunities this year, as the area of the 2015 close of $203.87 has been supportive since March, when the SPY first moved into the black for 2016 ... [I]f you were surprised by the magnitude of Friday's decline -- especially after hearing that many fund managers have raised cash levels to extremely high levels -- keep in mind that put open interest on soon-to-expire options may have (again) played a part in the downside volatility we experienced on Friday…To the degree put open interest induced heavier-than-normal selling of S&P futures on Friday, a snap-back rally would be expected. This would imply seeking short-term opportunities on the long side if the VIX remains below 26 and the SPY is above or in the vicinity of its 2015 close at $203.87."
--Monday Morning Outlook, June 27, 2016

The stock market reminds me of the batter that just hangs around, fouling off pitch after pitch. Whether it's slowing earnings growth, an economic report that misses its mark, Fed uncertainty, or political uncertainty both here and overseas, the fact of the matter is that major U.S. equity benchmarks are trading near all-time highs. But they have gone over a year without making a new high. Pitch after pitch is a strike; the pitcher has yet to record an out, but the batter has not yet reached base safely.

It was only one week ago that we entered a new trading week on the heels of a week-ending 600-plus-point drop in the Dow Jones Industrial Average (DJIA - 17,949.37) and financial television warning us about key equity benchmarks, such as the S&P 500 Index (SPX - 2,102.95) and DJIA, dropping below their 200-day moving averages.

Around this time last week, the DJIA and SPX were simultaneously trading at round millennium levels of 17,000 and 2,000, respectively. Last Monday’s trading was especially interesting, as the SPX dropped nearly 2% as investors lined up to sell following Friday’s dramatic move. But the CBOE Market Volatility Index (VIX - 16.12), which usually moves inverse to the market, dropped 6.8%. During Friday and Monday’s declines, the VIX never closed above 26.24 -- double the 2016 closing low -- perhaps indicative of what was about to come.

What came was a recovery from the "Brexit" selling that was launched sharply from millennium support levels on the DJIA and SPX to round-number levels that have been a thorn in the side to bulls for well over a year now. For those of you that follow Monday Morning Outlook, you know that we place heavy emphasis on round numbers, whether that means round numbers on an index or exchange-traded fund (ETF), round year-to-date percentage gains or losses, or gains that are a round-number percentage gain above a key low, such as the VIX peaking in an area that is 100% above its 2016 closing low.

Last week’s story was the volatility collapse in the options market, as some warned that volatility is here to stay, anticipating other countries in the European Union may consider leaving, and the impact of "Brexit" continued to weigh.

As we mentioned above, we found it interesting that the VIX peaked at double its low. But perhaps even more interesting is how the Euro STOXX 50 Volatility (VSTOXX), a European volatility gauge, peaked at 40, also double its 2016 low, per the chart below. As stocks recovered last week, the VSTOXX lost 37.5%, while the VIX declined by 42.7%, its biggest weekly drop ever.

The VIX and VSTOXX have room to decline to their respective 2016 half-highs at 14.07 and 20, respectively. Bulls hope that, if these respective areas hold as support, stocks can grind higher as the volatility benchmarks move sideways, much like the VIX did in April and May (second chart below).

For bulls, the good news is we are less at risk of a volatility explosion, relative to when we entered the month of June. Large Speculators on VIX futures, for example, have been dead wrong on the direction of volatility when moving into an extreme position. While they are net short, the short position on a net basis is about half of what it was in the weeks ahead of the "Brexit" referendum.

We enter the holiday-shorted week with round-number levels on multiple indices back in play -- something that short-term traders should respect if past is prologue -- meaning limited upside versus risk at this level. While the charts say limited reward versus risk, the sentiment backdrop paints a different story, one that suggests more reward in the market than the charts are currently implying (see the Reuters News summary immediately below of the most recent Bank of America/Merrill Lynch Wall Street Strategist survey).

Finally, with the first of July being a Friday, and Monday being a holiday, standard expiration of July options is less than two weeks away. So, as usual, we pasted a SPDR S&P 500 ETF (SPY - 209.92) combined open interest configuration chart for the weekly 7/8 and July 15 standard expiration series of options.

If there is a negative catalyst, a break below the 205 strike -- home to heavy put open interest relative to calls at that strike and on an absolute basis -- would put bulls at risk of delta-hedge selling down to the 198 strike at least. In the absence of a catalyst, a potential tailwind could be found in short covering related to the expiring put open interest. It is interesting that since the "Brexit" referendum, put open interest on SPY options expiring in the next three months has increased by about 1.5 million contracts, compared to just over 600,000 call contracts.